Dollar in Trouble
Precious metals prices enter the week with strong positive momentum after last Thursday's Federal Reserve announcement of another round of bond purchases using newly created currency – aka Quantitative Easing 3 (QE3).
Chairman Ben Bernanke had telegraphed the move in statements leading up to last week's FOMC meeting. And gold, silver, platinum, and palladium prices had already seen double digit percentage increases on expectations that more money printing was about to commence.
The program the Fed delivered exceeded those expectations and metals soared, along with the commodities complex. For starters, Bernanke announced $40 billion per month of new money to buy mortgage-backed securities. In addition, the Fed will continue to reinvest interest from the Fed's massive existing portfolio of Treasuries – for a total of $85 billion per month.
Even more importantly, Bernanke and Co. designed the program to be unlimited both in amount and duration, as opposed to prior iterations of QE. When asked when the program might end, he said the Fed wanted markets to understand it stood ready to dowhatever it takes to reduce unemployment and foster growth, including increasing the size of the "accommodation."
The gold price rose $36/oz (+2.1%) to close the week at $1,772. Silver gained $1.00/oz (+3.0%) and finished at $34.72.
Platinum and palladium both had even bigger moves – buoyed additionally by worsening unrest at South African mines where a vastly disproportionate share of world supply is produced. Platinum surged a whopping $117/oz (+7.3%) to $1,714 and palladium put on $43/oz (+6.5%) to close at $701.
Shorts Running Scared
The news last week compounded the problems for investors on the short side of precious metals in the futures markets. The leverage involved in futures contracts magnifies price moves. Anyone caught short (betting on downward prices) over the past few weeks is in deep trouble.
Famed metals trader Dan Norcini of JSMineset commented on the action last week in the futures pits, "Of course anybody that was positioned on the short side of the metals was simply run over when the news hit the wire. Those shorts were panicking out of their positions and more buying poured in the throughout the day..."
U.S. Credit Rating Quietly Downgraded Again
In a little publicized statement, credit rating agency Egan-Jones responded to last week's announcement of additional QE by immediately downgrading the U.S. from "AA" to "AA-". The firm noted that QE does very little to boost real GDP and merely devalues the dollar.
It looks like the Treasury and currency markets agree with Egan-Jones. The dollar index fell sharply following the Fed announcement and interest rates on Treasuries surged. Investors weighed the inflationary risks of holding dollars and decided to dump them.